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Published: May 29, 2012
 / Summer 2012 / Issue 67

 
 

Is Your Company Fit for Growth?

Second, a well-designed organization model can fuel dramatic growth by empowering managers to act like owners of the business. The managers of business units are given explicit financial and operational targets, along with clear decision rights that spell out what they can and cannot do by themselves to reach those targets. They are also given greater control over the resources assigned to them, and they can deploy these resources more flexibly. With incentives (such as bonuses and promotions) determined accordingly, business unit leaders become accountable for results, which are aligned with the company’s broader objectives in both the long term and the short term.

This tightly linked chain of empowerment, accountability, decision rights, and incentives allows the company to make decisions as close to the front lines as possible. Managers can capture opportunities in the market, while the corporate core focuses on building and maintaining the capabilities that all the business units share and on driving the company’s overall strategy and performance. People respond quickly to opportunities, collaborate across organizational boundaries well, make decisions resolutely, and execute effectively. Executives spend less time fighting political turf wars and more time thinking about their customers and competitors. Finally, costs naturally come down, and the potential for growth improves, because the organizational structure reinforces the practices developed through cost optimization.

A number of large companies have used organizational design to become fit for growth, without publicly explaining their internal changes. One example is a global energy company, which adopted a new cost-restructuring initiative in the early 2010s. During the previous decade, the company had grown rapidly through acquisition, buying a number of companies and developing an overly complex structure along the way. As one executive leader later noted, the company had gradually become “a bit of a patchwork.” Some of the business units were centered on countries or regions, whereas others were built around product lines. There were also functional groups — charged, for example, with marketing and sales or with manufacturing — that operated either globally or within regions, sometimes duplicating others’ efforts.

The cost-restructuring initiative was conceived as a multiple-year project, affecting the company’s processes, systems, people, and way of doing business. It reorganized the hierarchy into several global strategic business units, a tightly knit collection of corporate functions such as HR and finance, and a group of shared services to provide support. Although the concept of regions was preserved, P&L accountability shifted entirely to the strategic business units. To manage this new streamlined structure, the company created a single global framework for decision rights: It determined at a central level who would make critical company-wide decisions involving finance, planning, legal liability, procurement, the supply chain, sales credit risk, human resources, manufacturing, and technology. This new structure allowed the company to realize massive savings through scale and by eliminating redundancies. At the same time, the organizational units — strategic business units, shared services, and corporate functional groups — all had their own explicit decision rights. In short, the company created a new common global framework for its organization, while providing the business units and functions with sufficient latitude to run their operations nimbly.

Some companies use cost-restructuring efforts to dig deep into business units, reorganizing every process. This effort did not micromanage in that way; separate operational change initiatives were embedded in the new business units and corporate functions. But this program aligned the organization for growth, enabling it to be, as one observer put it, “a truly global company.”

Sustaining the Gains

When a large company pursues cost management and growth simultaneously, it must act as one unified entity. Avoiding disconnects and misalignments requires effective governance and business management practices. Financial, strategic, and operational planning processes should be treated as leading activities: They should set clear priorities and plans that involve all parts of the organization in the company’s “way to play” and central capabilities system. A business unit or function that does not fit with the common strategy is probably too expensive to keep in its current form. Corporate, business unit, and shared-services leaders should also collaborate informally to exchange knowledge and make sure that business units receive the support they need, consistent with their local conditions and the company’s overall way of creating value.

 
 
 
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Resources

  1. Shumeet Banerji, Paul Leinwand, and Cesare Mainardi, Cut Costs, Grow Stronger: A Strategic Approach to What to Cut and What to Keep (Harvard Business Press, 2009): E-book laying out a more detailed process for setting expense priorities.
  2. Vinay Couto, Ashok Divakaran, and Deniz Caglar, “Seven Value Creation Lessons from Private Equity,” s+b, Jan. 30, 2012: What top-tier PE firms can teach public companies about creating and sustaining value over time.
  3. Ken Favaro, David Meer, and Samrat Sharma, “Creating an Organic Growth Machine,” Harvard Business Review, May 2012: How chief executives can set a tone and context for expansion.
  4. Gary L. Neilson and Julie Wulf, “How Many Direct Reports?Harvard Business Review, April 2012: More explicit advice on span of control.
  5. Jaya Pandrangi, Steffen Lauster, and Gary L. Neilson, “Design for Frugal Growth,” s+b, Autumn 2008: Template for an organizational design that enables expansion while cutting costs.
  6. Scott Thurm, “For Big Companies, Life Is Good,” Wall Street Journal, Apr. 9, 2012: Analysis of financial climate at a cash-rich but uncertain moment.
  7. For more thought leadership on this topic, see the s+b website at: strategy-business.com/organizations_and_people.
 
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